How does a vendor take-back work?
SHORT ANSWER
The buyer pays most of the price at closing, often using a bank loan and their own money. The seller receives a promissory note for the rest, which the buyer repays over an agreed term.
Example: on a $3 million sale, the buyer pays $2.4 million at closing. The seller takes back a $600,000 note, repaid with interest over four years.
Why do buyers ask for it?
SHORT ANSWER
Banks lend based on what the business's earnings can repay. When the bank won't cover the full gap, a VTB fills it. It also shows the buyer that the seller believes the business will keep performing.
What are the risks for the seller?
SHORT ANSWER
If the buyer struggles, you may not be paid in full. The bank usually gets paid first, so your note often ranks behind it.
Ways to reduce the risk:
- Keep the VTB to a portion of the price you could live without if things went wrong.
- Get security, such as a general security agreement or a personal guarantee.
- Agree on interest, payment dates and what happens if payments are missed.
- Check the buyer's experience and finances carefully.
How is a VTB taxed in Canada?
SHORT ANSWER
If part of your sale price is paid over time, you may be able to claim a capital gains reserve. This spreads the taxable gain over up to five years, with at least 20% of the gain included each year. Confirm the details with your CPA.